Commodity ETF Spotlight: UCI In Focus

With the rapid expansion and development of the ETP industry, investors can now choose from a vast selection of products that offer both broad-based and sector-specific commodity exposure. With the exchange-traded product structure, investors have the ability to gain access to commodities without having to encounter the difficulties and drawbacks of opening a futures account. One of the most appealing broad-based commodity products on the market is the E-TRACS UBS Bloomberg CMCI ETN (UCI), which offers exposure to a basket of 26 different commodity futures contracts of varying maturities [see also 12 High-Yielding Commodities For 2012].

UCI’s structure and unique methodologies make this ETN an attractive option for investors who wish to establish a broad-based and long-term commodities position in their portfolio.

Under The Hood

UCI seeks to replicate the UBS Bloomberg Constant Maturity Commodity Index Total Return, offering exposure to 26 different commodity futures contracts. The index breakdown by commodity family is presented in the following table (as of 12/31/2010) :

Commodity Group

Index Weight

Energy

34.17%

Agriculture

29.22%

Industrial Metals

27.14%

Precious Metals

5.5%

Livestock

3.96%

UCI features allocations across all of the major segments of the commodity market, including exposure to energy, agriculture, industrial metals, precious metals, and livestock. UCI’s underlying portfolio is broad-based and well-rounded with relatively equal allocations to the energy, agriculture, and industrial metals sectors.

Noteworthy Features

UCI offers investors a broad-based and well-balanced commodity exposure that is considerably different from other products on the market, which tend to be dominated by energy holdings. This ETN offers a deep portfolio of 26 different commodity futures contracts with no one commodity sector significantly outweighing the other. The fund’s largest holdings include energy, agriculture, and industrial metals products as well as small allocations towards precious metals and livestock [see also Three Reasons Why Gold Is Overvalued].

A distinguishing feature of UCI is that it employs a unique maturity structure that allows the underlying holdings to be diversified across five constant maturities from three months up to three years. Allocations in terms of maturity are as follows: 3-month (52%), 6-month (22%), 1 year (15%), 2 years (6%), and 3 years (4%). Additionally, this diversification across maturities can potentially mitigate the adverse effects of contago, which is an inherent disadvantage in futures-based products.

It is worth noting UCI’s exchange-traded note structure, which exposes investors to the possible credit risk of the issuing institution. Although the ETN structure has several drawbacks, UCI does produce a number of advantages over comparable ETFs. Unlike funds that trade futures contracts, commodity ETNs do not require investors to fill out a K-1 form at the end of the year. This benefit implies that there is no annual mark-to-market that spurs a taxable event, and shareholders of UCI have to record a loss or gain only upon sale [see also 25 Ways To Invest In Crude Oil].

How To Use

UCI’s advantageous tax treatments and unique maturity makes this ETN an appealing option for investors wishing to add long-term, buy-and-hold commodity exposure. Unlike most commodity ETPs that are dominated by the energy sector, UCI’s well-diversified portfolio maintains relatively balanced allocations towards energy (34%), agriculture (29%), and industrial metals sectors (27%) while also giving exposure to precious metals and livestock. This ETN could be an appealing option for investors who wish to establish a well-balanced and broad-based commodity position in portfolios with longer time horizons.

Disclosure: No positions at time of writing.

About Daniela Pylypczak

Daniela Pylypczak-Wasylyszyn is a regular contributor to CommodityHQ.com, where she primarily focuses on commodity producers equities. She is also an analyst for ETFdb.com, where she contributes articles and analysis each week. Since joining the team in 2011, Daniela has quickly grown to be one of the most widely-followed authors in the industry. Her articles are syndicated in a number of online publications, including Financial Advisor Magazine, Fidelity.com, and Yahoo! Finance. Daniela is also a contributor for TraderHQ.com and Dividend.com. Daniela graduated from DePaul University with a bachelor’s degree in finance and economics.

Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute
individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities
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Just for added clarity, investors don’t fill in a K-1 for investments in commodity trusts/partnerships. The partnership provides the K-1 to the investor (typically mid-February) who, as they would with a 1099, enters the 4 or so different income/expense items in their individual returns.